Trading on the News in the Forex World is Both Defensive and Offensive

Trading in foreign currencies is never an easy occupation. The market is enormous, as is the stature and financial capacity of most major participants. For a single retail trader to assimilate every bit of news and financial data and out-guess the “Big Boys” is often an effort in futility. The exercise becomes more one of managing risks and searching for a strong trend to latch onto for an extended period of time. Losses are inevitable, but if controlled, then one good trend can offset several losing trades and offer potential profits and the opportunity to utter that favored phrase, “The trend is my friend!”

One learns quickly that major news releases can be a “double-edged sword”. If you are unaware of a pending major economic release, the subsequent volatility can wreck the most well-intentioned trading strategy. Fundamental data releases from government agencies around the world influence stock, commodity, and currency markets daily.

However, the forex market tends to react more severely to these releases since the relative value, i.e., exchange rate, of a given currency pair is determined by the global consensus of traders’ evaluation of economic variables. Typically, the forex market stalls before a major release, then an initial “head fake” ensues while analysts assimilate the data to form an opinion, and once an opinion is formed, the market moves quickly in one direction. The resulting trend can last for hours, even days in some cases.

Employment data appears to be the largest market mover in this category. The release of Non-Farm payroll data on the first Friday of every month by the U.S. Department of labor is a much-anticipated event. The chart below is indicative of the unfolding events:

The market reaction of the “GBP/USD” currency pair is depicted for this previous Friday’s release, the first such release in 2011. The data is generally released on the first Friday of every month at 8:30 EST, or 13:30 Greenwich Mean Time, GMT, as per the chart above. As one follows the timeline from the left, the market anticipated good results in the data that would strengthen the Dollar, the “head fake” so to speak. After recovering during the “assimilation period”, the market reacted in the opposite direction, a 120-pip move, as the employment data was not as strong as the market had believed that it would be.

“Trading on the news” is the moniker given to this short-term trading strategy. It is often said that it is not for the faint of heart because market movements can be radical with many “head fakes” to deal with before the solid trend takes over. The shear volume of trading orders also becomes problematic, often inundating the servers and switchboards of forex brokers, such that order execution becomes paramount and the responsibility for executing stop-loss orders is often exempted by your broker agreement.

For those traders that feel worthy of the task, it is highly recommended that you practice several times with your forex trading demo account before venturing into these volatile trading waters. It is not necessary that you perfectly time the market or guess which direction will be the most likely to occur. The objective is to grab onto the trend once it has formed which typically takes about forty-five minutes from the release point.

The British Pound pair is generally accredited with the most potential for movement. In this case, the 120-pip move would have generated a 70 basis point return. The comparable returns for the EUR, JPY or AUD were in the 55 to 60 basis point range.